South African Reserve Bank Governor Lesetja Kganyago has signalled that further interest rate increases remain a possibility after warning that inflation expectations have risen well above the central bank’s 3% target, reinforcing the case for tighter monetary policy.
Speaking in an interview with Francine Lacqua on Bloomberg Television, Kganyago defended the Reserve Bank’s decision to increase the repo rate by 25 basis points to 7% in May, the first rate hike in three years, arguing that the move was necessary to prevent temporary external shocks from becoming entrenched in the domestic economy.
“The inflation expectations have risen, they are above our target and that is the concern, and that is what we should actually be responding to,” Kganyago said, noting that inflation expectations have climbed above 4%, significantly higher than the Bank’s preferred 3% target.
The governor stopped short of indicating what the Monetary Policy Committee will decide at its next meeting on 23 July, saying policymakers would assess the latest economic data before reaching a decision. However, financial markets are increasingly pricing in another rate increase as the central bank continues its efforts to contain inflationary pressures.
South Africa’s annual inflation rate accelerated to 4.5% in May, driven largely by rising energy costs following geopolitical tensions in the Middle East. The Reserve Bank has consistently warned that while supply-side shocks may initially be temporary, they risk becoming more persistent if businesses and consumers begin to expect higher inflation over the longer term.
Kganyago stressed that maintaining well-anchored inflation expectations remains one of the central bank’s primary objectives. He cautioned that delaying policy action could ultimately require far more aggressive interest rate increases in the future, making it more difficult to restore price stability.
He also indicated that core inflation, which excludes the more volatile food and energy components, is expected to reach its peak during the first quarter of next year, suggesting underlying price pressures remain a concern despite the temporary nature of some external shocks.
Beyond inflation, Kganyago acknowledged that policymakers continue to navigate an increasingly uncertain global environment characterised by geopolitical instability and emerging technological shifts, including the short-term inflationary effects associated with artificial intelligence and structural changes across global markets.
Addressing investor sentiment following recent anti-migration protests in South Africa, Kganyago sought to reassure markets, saying authorities had responded decisively while upholding the constitutional right to peaceful protest. He added that he had not encountered concerns from investors regarding South Africa’s political stability, pointing to the largely peaceful nature of the demonstrations and the swift response by law enforcement agencies.
With inflation expectations remaining elevated and financial markets anticipating further policy tightening, attention will now turn to the South African Reserve Bank’s next Monetary Policy Committee meeting later this month, where policymakers are expected to determine whether additional interest rate increases are required to bring inflation back towards the Bank’s long-term target.